I'm starting a small consulting business in Los Angeles. Everyone keeps telling me to form my LLC in Wyoming or Nevada to avoid California's $800 annual franchise tax.
Is this actually legit? Seems too easy. What's the catch?
Wait, so just being a CA resident triggers this? That seems aggressive.
What if I have a Wyoming LLC and only have clients outside of California?
Good point. Under AB 85, LLCs formed on or after January 1, 2021 are exempt from the $800 minimum franchise tax for their first taxable year. This applies if:
So new California LLCs get a one-year grace period. But starting year two apparently, you owe the $800 regardless of income. And if you have a Wyoming LLC doing business in CA, you still need to register as a foreign LLC and pay smh.
This is helpful but depressing. So basically if I live and work in CA, I'm paying that $800 no matter what.
Is there any legitimate reason to use a Wyoming or Delaware LLC if I'm in California?
Also worth mentioning - the FTB is not messing around. They have data sharing agreements with other states and the IRS. If you file a federal return showing LLC income and you're a CA resident, they WILL find you.
I've heard of people getting hit with 5+ years of back taxes, penalties, and interest. Not worth the risk to save $800/year.
One thing I'll add: if your business is 100% online and you're genuinely considering relocating out of state to avoid CA taxes, make sure you ACTUALLY move. The FTB is notorious for auditing people who claim to have moved but still have CA ties (house, spouse working in CA, kids in CA schools, etc.).
I know someone who "moved" to Nevada but kept their CA driver's license and still spent 200+ days per year in CA. Got hit with 4 years of back taxes plus penalties. Not worth the risk unless you genuinely relocate.
This thread still surfaces for the Wyoming and Nevada question so it is worth restating the mechanism rather than just the conclusion.
Revenue and Taxation Code § 17941(a) applies the annual tax to a limited liability company doing business in this state, and it expressly includes companies formed under the law of any other state. So forming elsewhere does not by itself take you outside the section. What matters is whether you are doing business in California.
The amount is not written in § 17941 itself. It cross refers to § 23153(d), which sets the figure at eight hundred dollars.
Adding the definition, because doing business is the whole question and people guess at it.
§ 23101(a) defines it as actively engaging in any transaction for the purpose of financial or pecuniary gain or profit. Subsection (b) then adds bright line thresholds based on California sales, property and payroll, each expressed as the lesser of a dollar figure or a percentage of your totals.
Important detail that trips people up: those dollar figures are indexed, and the statute directs the Franchise Tax Board to revise them annually. Do not rely on a number you read in an old forum post, including this one. Look up the current year figure.
OP, years later, with the answer I eventually got and paid for.
I formed in Nevada, kept operating from California, and ended up registered in California anyway and paying the annual tax regardless. The out of state formation added a second set of filings and fees on top, so it cost me more than doing nothing clever would have.
There are real reasons to form outside your home state. Avoiding the California annual tax while you sit in California and run the business from there is not one of them, and § 17941(b)(1) reaches registered companies too. I wish this thread had existed before I did it.